Philip Morris (New Zealand) is suing British American Tobacco (New Zealand), alleging its larger rival is breaching competition law by locking retailers into contracts designed to preserve its dominance in a $2.5 billion market.

In the lawsuit, filed in the High Court in Auckland, PMNZ alleges BATNZ "is unlawfully incentivising and compelling retailers to restrict the availability of competitor products," it said in a media statement. PMNZ is seeking unspecified damages in five causes of action for alleged breaches of the Commerce Act.

BATNZ said in a separate statement that it "categorically denies the allegations."

Whichever side wins in court, the lawsuit shines a light on the increasingly opaque arrangements in New Zealand's tobacco market.

PMNZ says BATNZ has 65 percent of the local market for cigarettes and 63.7 percent of sales of roll-your-own (RYO) tobacco. It competes with Imperial Tobacco New Zealand, which has 23 percent of the cigarette market and 31 percent of RYO, while PMNZ has 12 percent and 5.4 percent respectively.

An estimated 605,000 adults burn their way through 2 billion cigarettes a year in New Zealand, where PMNZ says the tobacco industry is "mature, highly regulated and heavily taxed." BATNZ's brands include Rothmans, Dunhill, Benson & Hedges, Winfield, Holiday, Pall Mall, Freedom and Club along with RYO brands such as Park Drive. PMNZ sells Marlboro, Longbeach and Choice cigarettes and Craftsman and Longbeach RYO products. Imperial Tobacco's brands include Peter Stuyvesant, West, Horizon, Camel and JPS and in the RYO category, Drum, Pocket Edition and Horizon.

Tobacco brands have all but disappeared from the advertising landscape in the wake of the Smoke-free Environments Act 1990 and the Smoke-free Environments Regulations 2007, which banned all tobacco advertising and point of sale display. Plain packaging came into effect this month. As a result, PMNZ says, tobacco companies can only compete on price, product availability at retail and product innovation.

PMNZ says BATNZ's large number of historically popular brands make it "an unavoidable trading partner for many retailers" and its dominance and the rules it imposes on retailers have the effect of squeezing out competitors. Tobacco has three channels to market - 'general trade', which is dairies and independent retailers; 'organised convenience', which is retail store chains such as those operated by oil companies and liquor retailers, and 'grocery' - stores owned by the major supermarket chains.

With the restrictions of display and advertising, retailers typically store tobacco products in covered cabinets known in the trade as "unitry". In the general trade category, BATNZ owns about 75 percent of the unitry, which it provides "free" to retailers. but the cabinets come with conditions, PMNZ says. They include a requirement that the upper, or 'primary units' of cabinets be kept "fully stocked with 100 percent BATNZ products at all times", and in accordance with BATNZ 'planograms' which specify where particular products are placed in the cabinets.

BATNZ's arrangements also include paying cash inducements to retailers who meet the trading terms, PMNZ alleges. Such payments are withheld when the terms are breached and BATNZ does random spot checks to ensure compliance, it says. There are also rules known as "ranging restrictions" if the mix of products is changed or if a retailer wishes to increase its offering of a rival's products, to ensure there is no loss of shelf space for BATNZ products, it says.

PMNZ says the rules are anti-competitive, breach the Commerce Act and have caused it to suffer loss and damage. The statement of claim alleges BATNZ's conduct "shows flagrant disregard for its Commerce Act 1986 obligations."

A BATNZ spokeswoman said in an emailed statement that her company is "confident that we are not engaging in anti-competitive conduct and will defend our position when the case is heard."

"We are strongly committed, and have actively engaged for some time, to have reduced risk products regulated and legally available to adult New Zealand smokers as soon as possible," she said..

PMNZ says that traditionally, adult smokers have been loyal to their preferred brand but in recent year, as taxes have increased, price has become a key factor and the tobacco firms all offer so-called 'value brands.' The value segment "is now the most contested part of the tobacco market," PMNZ says.

It also says the BATNZ rules have implications for the availability of so-called e-cigarettes, which deliver nicotine to the user via a vapour rather than with smoke and are regarded as a less harmful alternative to smoking.

The government received a total of $1.7 billion in duty on tobacco sales in 2016 from the big three producers - British American Tobacco, Imperial Tobacco and Philip Morris - which all lifted sales in New Zealand that year.

(BusinessDesk)

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